Edited version of private ruling

Authorisation Number: 1011874367520

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Ruling

Subject: GST and reduced input tax credits

Question

Is the entity entitled to reduced input tax credits (RITCs) on the acquisitions of services provided by AAA Pty Ltd (AAA) and BBB Pty Ltd (BBB) in relation to the entity's sale of shares in CCC Ltd (CCC)?

All references are to the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) unless stated otherwise.

Answer

Yes, the entity is entitled to RITCs on the acquisitions of services provided by AAA and BBB in relation to the entity's sale of shares in CCC.

Relevant facts and circumstances

· The entity sold CCC shares.

· The sale is a financial supply for GST purposes.

· AAA and BBB were engaged to provide the entity with services in relation to the sale of the CCC shares.

· AAA and BBB provided their services jointly as a team and were not independently appointed.

The nature of AAA's services

· The contract entered into between the entity and AAA states that AAA is pleased to provide broking services to the entity in relation to the entity's sale of CCC shares. The contract further provides that AAA's services will relate to arranging the sale of CCC shares and will include the following incidental services:

o Advising on the appropriate strategies for the sale of the shares.

o Determining the appropriate structure for the sale of shares.

o Advising on the market value of the shares at the time of sale.

o Assisting in executing the sale of shares.

· The consideration for AAA's services is a fixed fee.

· Furthermore, the Tax Office is advised that the actual work performed by AAA includes:

o Advising on the appropriate strategies for the sale of the shares:

§ Identifying the alternative potential buyers, i.e. specific institutions, specific broking groups, and private funds that had a positive view towards investments broadly and CCC specifically.

o Determining the appropriate structure for the sale of shares, for example:

§ Bookbuild,

§ On market or off market,

§ With or without price indications/floor,

§ Underwritten or non-underwritten.

o Advising on the market value of the shares at the time:

§ Peer comparisons/benchmarking,

§ Recent comparable transactions,

§ Buyer expectations re-discounts or not for a "block of trade",

§ Identifying a sale price for the sale of shares.

o Assisting in executing the sale of shares:

§ Ensuring transaction is effected in best interest of sellers,

§ Facilitating discussions with institutional and retail broker,

§ Procuring documentation to effect sale of shares,

§ Ensuring structures are fair and reasonable.

The nature of BBB's services

· The contract entered into between the entity and BBB states that BBB is pleased to provide broking services to the entity in relation to the entity's sale of CCC shares. The contract further provides that BBB's services will relate to arranging the sale of CCC shares and will include the following incidental services:

o Advising on the appropriate strategies for the sale of the shares.

o Determining the appropriate structure for the sale of shares.

o Advising on the market value of the shares at the time of sale.

o Assisting in executing the sale of shares.

· The consideration for BBB's services is a fixed fee.

· Furthermore, the Tax Office is advised that the actual work performed by BBB includes:

o Advising on the appropriate strategies for the sale of the shares:

§ Identifying the alternative potential buyers, i.e. specific institutions, specific broking groups, and private funds that had a positive view towards investments broadly and CCC specifically.

o Determining the appropriate structure for the sale of shares, for example:

§ Bookbuild,

§ On market or off market,

§ With or without price indications/floor,

§ Underwritten or non-underwritten.

o Advising on the market value of the shares at the time:

§ Peer comparisons/benchmarking,

§ Recent comparable transactions,

§ Buyer expectations re-discounts or not for a "block of trade",

§ Identifying a sale price for the sale of shares.

o Assisting in executing the sale of shares:

§ Ensuring transaction is effected in best interest of sellers,

§ Facilitating discussions with institutional and retail broker,

§ Procuring documentation to effect sale of shares,

§ Ensuring structures are fair and reasonable.

Reasons for decision

Entitlement to input tax credits

The general rule under Division 11 is that no entitlement to input tax credits would arise for acquisitions that relate to the making of input tax supplies as they are denied creditable purpose under paragraph 11-15(2)(a). That paragraph states that:

However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

…

In this case, the entity's acquisitions of services from AAA and BBB are acquired in relation to its input taxed financial supply of selling CCC shares and are thus denied creditable purpose under the general rule of Division 11.

One of the exceptions to the general rule is where the financial acquisitions threshold (FAT) is not exceeded. This exception is provided under subsection 11-15(4). The FAT is exceeded if you make, or are likely to make, acquisitions in relation to financial supplies where the input tax credits relating to those acquisitions would exceed the lesser of either:

· $50,000, or such other amount specified in the GST Regulations (first limb test), or

· 10% of the total amount of input tax credits to which you would be entitled (second limb test).

If either or both of the above levels are exceeded, an entity will have exceeded the FAT.

In this case the entity exceeds the FAT. Therefore this exception does not apply.

Entitlement to reduced input taxed credits on acquisitions related to making financial supplies

Another exception to the general rule under Division 11 exists and is provided under Division 70. Subsection 70-5(1) states that an entitlement to a reduced input taxed credit may arise for acquisitions of a specified kind relating to making financial supplies known as 'reduced credit acquisitions' (RCAs).

The table in subregulation 70-5.02(2) of the GST Regulations provides a list of acquisitions that are RCAs within the meaning of subsection 70-5(1).

The RCA items relevant to this case are discussed below.

Securities transaction services

Item 9 in the table in subregulation 70-5.02(2) of the GST Regulations (item 9) deals with arrangement services provided by a financial supply facilitator in respect of the provision, acquisition or disposal of an interest in a security. Specifically, item 9 is in the following terms:

Arrangement, by a financial supply facilitator, of the provision, acquisition or disposal of an interest in a security, including the following:

(a) order placement and trade execution;

(b) clearance and settlement of trades;

(c) management of the issue of securities, including rights and bonus issues;

(d) arranging flotations and privatisations;

(e) arranging mergers and acquisitions;

(f) arranging takeover bids;

(g) performing a settlement, including issue of drafts and encashment;

(h) other securities transactions, including lodgment, withdrawal and exchange control;

(i) underwriting, except a matter that is described in the table in regulation 40-5.09

Item 9 - existence of an arrangement by a financial supply facilitator

A fundamental requirement which must be satisfied under item 9 is the existence of an arrangement by a financial supply facilitator.

Paragraph 287 of Goods and Service Tax Ruling GSTR 2004/1 Goods and services tax: reduced credit acquisitions (GSTR 2004/1) provides that an arrangement includes activities relating to the preparation for the transaction, the planning of the transaction and the settlement of the details of the transaction.

Furthermore, paragraph 291 of GSTR 2004/1, provides that:

Whether or not a service is the arrangement of a transaction depends upon the nature of the services undertaken, not the name applied to them. For example, a merchant bank may invoice its clients for advisory services for a securities transaction. If, however, the merchant bank is a financial supply facilitator in relation to that supply of securities, and is, in reality, supplying arrangement services under the agreement, the acquisition of those services is a reduced credit acquisition under item 9.

It follows that the nature of the services being rendered is crucial in determining whether an entity is arranging a transaction for a financial supply provider.

In our view, GSTR 2004/1 requires an entity to have a significant or dominant role in co-ordinating or overseeing a whole transaction in order to be accepted as 'arranging' for the purposes of Item 9. Thus, the arranger arranging the transaction for a financial supply provider must:

· have substantial control over the necessary acquisitions and processes, and

· be charged with the responsibility of facilitating the transaction from formation to completion.

Where the services acquired by the financial supply provider are on a piecemeal basis, it would lead to the conclusion that the services acquired are not arrangement services.

A further requirement to be taken into account when considering whether an acquisition falls within item 9 is that the acquisition must be an acquisition of arrangement by a financial supply facilitator.

The definition of a financial supply facilitator is provided in regulation 40-5.07 of the GST Regulations which states that:

A financial supply facilitator, in relation to the supply of an interest, is an entity facilitating the supply of the interest for a financial supply provider.

In this case, the financial supply provider is the entity.

A financial supply facilitator facilitates the supply of an interest where its activities have the effect of helping forward or assisting a particular financial supply, rather than those that simply assist the financial supply provider. It follows that the activities of a financial supply facilitator must have a sufficient nexus with the supply of an interest by a financial supply provider.

A sufficient nexus requires that there be an identifiable association with the supply that goes beyond a mere general association. An identifiable association does not mean that the activities have to be directly linked to the supply, however it does require that there be a substantial connection so as to exclude activities that are only generally related (for example, promotion, advertising, product design, market research or similar types of activities). The activities must relate to and assist a particular supply, not merely contemplated supplies. In the absence of this identifiable association, an entity will not be a financial supply facilitator of the supply of an interest (see paragraph 32 of GSTR 2004/1).

It follows that it is only when the financial supply facilitator is carrying out activities that are sufficiently or substantially identifiable with the actual financial supply being made, such that they help forward or assist the financial supply, that the activities can be said to comprise an arrangement by a financial supply facilitator of an interest in a security.

Services remunerated by commission and franchise fees

Item 27 in the table in subregulation 70-5.02(2) of the GST Regulations (item 27) deals with services provided by financial supply facilitators for which they are paid commission by a financial supply provider.

'Commission' is defined in GSTR 2004/1 by reference to its definition in Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions (GSTR 2002/2) as:

payment to an agent or similar entity, or to an employee for particular services rendered. The payment may be made on a fixed sum or fixed percentage basis, or on a sliding scale based on the value of the transaction.

Acquisition of AAA's services

In consideration of the nature of AAA's services, our view is that AAA's services fall within item 27.

Based on the information submitted, our opinion is that AAA's services do not satisfy all the elements of an arrangement service which requires the preparation for, planning of and settling the details of the financial supply of issuing shares.

However, AAA's overall role with respect to assisting in executing the sale of shares supports the view that AAA's activities have a sufficient nexus with the financial supply of selling the shares that goes beyond a mere general association. As such, our view is that AAA is a financial supply facilitator with respect to the share sale.

Additionally, we consider that the consideration provided for AAA's services falls within the definition of a commission for the purposes of item 27.

Accordingly, our view is that the entity is entitled to RITCs on the acquisition of AAA's services.

Acquisition of BBB's services

In consideration of the nature of BBB's services, our view is that BBB's services fall within item 27.

Based on the information submitted, our opinion is that BBB's services do not satisfy all the elements of an arrangement service which requires the preparation for, planning of and settling the details of the financial supply of issuing shares.

However, BBB's overall role with respect to assisting in executing the sale of shares supports the view that BBB's activities have a sufficient nexus with the financial supply of selling the shares that goes beyond a mere general association. As such, our view is that BBB is a financial supply facilitator with respect to the share sale.

Additionally, we consider that the consideration provided for BBB's services falls within the definition of a commission for the purposes of item 27.

Accordingly, our view is that the entity is entitled to RITCs on the acquisition of BBB's services.